WASHINGTON – The Federal Reserve agreed Tuesday to raise the amount of capital that big banks must hold to prevent their collapse and reduce the threat they pose to the broader financial system.
The higher capital requirements were mandated by Congress in the aftermath of the 2008 financial crisis. They are also in accordance with international standards agreed to after the downturn.
Banks had lobbied to modify the requirements on higher capital, saying they could hamper their ability to lend. But experts said most big banks have already increased their capital reserves.
“With these revisions to our capital rules, banking organizations will be better able to withstand periods of financial stress, thus contributing to the overall health of the U.S. economy,” Fed Chairman Ben Bernanke said.
But critics say the rule fails to go far enough and keeps taxpayers at risk of having to bail out banks again, should they suffer the kinds of losses incurred during the crisis.
“The rule announced by the Federal Reserve today fails to learn the lesson of the most recent crisis and makes the next crisis – and more bailouts – more likely,” said Dennis Kelleher, president of Better Markets Inc., a nonprofit bank watchdog group.
Hundreds of U.S. banks received federal bailouts during the financial crisis that struck in 2008 and triggered the worst economic downturn since the Great Depression. The list included the nation’s largest financial firms, including JPMorgan Chase, Goldman Sachs, Citigroup, Bank of America and Wells Fargo. The banking industry has been recovering steadily since then, with overall profits rising and banks starting to lend more freely.
Under the rule, all banks will need to maintain a level of high-quality capital equal to 4.5 percent of their loans and other assets, weighted by how risky those assets are.
A Fed staff memo said banks with more than $10 billion in assets and more than 95 percent of those with less than $10 billion in assets would meet the 4.5 percent capital requirement. There is currently a 4 percent requirement for capital, but it is not restricted to just high-quality capital, such as bank stock or retained earnings.
The nation’s 19 largest banks with assets of $250 billion or more will have to start meeting the requirements by Jan. 1. All other banks will have to begin meeting the requirements a year later. The rules will be fully phased in by the end of 2018.